Interest-rate blow to homeowners - and worse may be to come

Published on 12/01/2007 01:12

Key quote

"Any increase in mortgage interest rates could spell disaster for people whose finances are balanced on the very edge of affordability." - CITIZENS ADVICE BUREAU

Story in full HOMEOWNERS and shoppers were warned last night to brace themselves for the cost of borrowing to rise still further after the Bank of England surprised economists by hiking interest rates to their highest level for five years.

The quarter-point rise to 5.25 per cent was the third increase in six months, and it convinced analysts the Bank is worried about rising inflation and may lift rates again to control prices and curb the rampant housing market.

Yesterday's decision shocked the City and prompted warnings that thousands of heavily indebted consumers could be driven into financial distress.

According to the Council of Mortgage Lenders, the rise will add about 15 to monthly payments on a repayment mortgage of 100,000 and 20 a month to an interest-only mortgage.

At 2.7 per cent, inflation is already above the government's target, thanks to increasing fuel and transport costs. Figures due next week are expected to show inflation has risen even higher.

With surveys suggesting annual wage settlements are running at 4 per cent this year, some economists predict the Bank will feel compelled to raise rates again later this year, maybe more than once.

"Another rise is on the cards, and there may be more after that," said Roger Bootle, a former Treasury "wise man" who is now an economic adviser to Deloitte & Touche.

Personal borrowing in Britain stands at more than 1.3 trillion, and there were more than 100,000 personal bankruptcies last year, with debt groups predicting even more this year.

The Citizens Advice Bureau warned that the latest rate rise could have disastrous consequences for some.

"We are already seeing a rapidly growing number of people falling behind with mortgage payments, and in some cases threatened with repossession, and we know some people are taking on mortgages that stretch them to the absolute limit," it said. "Any increase in mortgage interest rates could spell disaster for people whose finances are balanced on the very edge of affordability."

The Bank's rate-setting decisions are independent of government, but Vince Cable, the Liberal Democrats' Treasury spokesman, said ministers must still answer for the effects of the increase.

"Unfortunately, this is likely to lead to a further rise in repayment difficulties on mortgages, including repossessions and bankruptcies," he said. "The government has seemingly washed its hands of the whole problem of personal debt. It has spent a lot of time regulating savings and investments, while ignoring irresponsible lending."

Labour groups and business leaders also lamented the Bank's decision.

Iain McMillan, the director of CBI Scotland said it was "disappointing" that the Bank had acted after only "tentative" information about pay settlements.

The TUC said there was "not enough evidence to justify an increase".